What's next in AMD's financial maneuvering

MattAndrejczak

SAN FRANCISCO (MarketWatch) --Advanced Micro Devices Inc. capitulated Monday, slashing its spending plans until it figures out its next move in its battle with larger rival Intel Corp. Investors cheered, sending the stock up nearly 4%.

AMD said it will cut its spending to $2 billion from $2.5 billion. While the plan is a step in the right direction, the No. 2 maker of chips used in PCs and data-server networks is still on shaky ground and other financial maneuvers are likely to come, some industry watchers say.

"Management is likely buying time to figure a way out of the hole," wrote Hans Mosesmann, an analyst at Nollenberger Capital Partners who has been skeptical of AMD for a long time.

Leading up to the announcement, industry forecasters feared the Sunnyvale, Calif.-based semiconductor maker would be cash-strapped by this fall unless it raised money or cut spending. Not much changed with Monday's statement.

AMD
AMD, +2.37%
may have to cut capital expenditures further, unless it can raise a $1 billion in cash, analysts say. With $1.6 billion of cash on its balance sheet at year-end 2006, AMD still doesn't have enough money to fund its planned capital outlays.

"The company's liquidity position remains tenuous," wrote Doug Freedman, analyst at American Technology Research, which reiterated its sell rating on AMD's stock.

Faced with more aggressive competition from Intel
INTC, -0.83%
AMD's financial performance is withering amid lower average selling prices and unit sales for its computer chips.

The company warned Monday its first-quarter sales would be $1.225 billion, 19% below Wall Street's consensus estimate, according to analysts polled by Thomson Financial. It comes as AMD has had to cut prices on some of its microprocessors to clear out older parts that aren't as competitive with some of Intel's latest offerings.

AMD's cash war chest, according to most analyst forecasts', isn't expected to grow over the next few quarters due to negative cash flow from operations. That means further cuts to capital expenditures or raising more money are the company's primary options.

Raising more money may be sticky. AMD borrowed $2.5 billion from Morgan Stanley last October to finance its acquisition of ATI Technologies, which saddled AMD with debt.

Under the terms of that credit agreement, if AMD raises money through a new debt issue, it is required to use all those proceeds to help pay down the Morgan Stanley loan. If AMD issues new shares, 50% of those proceeds would go toward the loan, according to Securities and Exchange Commission filings.

AMD could try to renegotiate the terms of that lending deal, observers say.

The company is moving to increase its number of authorized shares of common stock from 750 million to 1.5 billion, a move that must be approved by shareholders at the chipmaker's May 3 annual meeting.

AMD, in a recent proxy statement, said the ability to issue common stock may be used for such things as raising "cash to expand our business."

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